Playing Nice in the Sandbox:
the Securities and Exchange Commission’s New Sandbox Framework
by: Atty. Gabriel G. Tabeta
Sandboxes, whether as places for children to play in or as a space for major industry players and startups to launch new products, have always been venues for creation and innovation. But regardless whether someone is building a sandcastle or funding a new technology that will disrupt the finance industry, sandboxes have rules.
While playground sandboxes have simpler rules like not throwing sand at others and not breaking other children’s sandcastles, these rules are not too far off in essence from the rules regulatory sandboxes set to protect others from harm.
The Regulatory Sandbox has recently emerged as a favored approach to encourage technological innovation while ensuring public safety and welfare. Its proposition is fairly simple: to facilitate innovation in a safe and responsible manner.
It is basically is a regulatory tool that allows firms to test new innovations under the supervision of a government regulator. It is meant to provide a safe space for businesses to test new innovations with little to no risk of regulatory action or enforcement, as long as they follow the rules of the sandbox. Innovations that can be tested include new products, services, solutions, technologies, business models and even policies.
In a sandbox, regulation is often relaxed or rules are adapted to create a more conducive environment for experimentation. As new innovations can change industry landscapes, sandboxes also help regulatory bodies to evolve their regulatory frameworks and keep up with developments. Many countries have regulatory sandboxes for this purpose. Countries like Spain and Singapore have launched their regulatory sandboxes to test new Artificial Intelligence (AI) and FinTech products vis-à-vis the capability of regulations to effectively accommodate these innovations.
In 2022, the Bangko Sentral ng Pilipinas (BSP) issued guidelines for creating a regulatory sandbox to allow banks and new players to test emerging technologies for delivering financial products and services. On April 25, 2024, the Securities and Exchange Commission (SEC) followed suit through Memorandum Circular No. 9, Series of 2024, which establishes the SEC Strategic Sandbox or SEC Stratbox. Similar to the BSP Regulatory Sandbox Framework, the SEC Stratbox allows participants to test new financial products and services in a controlled environment. This provides participants with a safe space while providing the SEC a platform to better understand the benefits and risks of innovation, while developing appropriate policies, guidance, and/or regulations to reap those benefits, protect consumers, and safeguard its regulatory system.
The SEC Stratbox
The SEC Stratbox is a regulatory sandbox framework that enables businesses and innovators to test new products, services, or business models in a live, controlled environment within a defined period. It encourages innovation by allowing products or services operating in “legal gray areas” some degree of protection from regulatory action for a limited time. This is ideal for businesses offering cryptocurrency and operating virtual asset exchanges, which may face regulatory scrutiny but are not specifically prohibited by existing Philippine laws.
During the sandbox period, the SEC observes the effects of the new product or service on the public and identifies gaps in laws and regulations. Conversely, businesses can demonstrate their ability to comply with existing laws and provide feedback on improving regulations to accommodate their innovations.
How the SEC Stratbox works
The SEC Stratbox permits SEC-registered entities to participate in the sandbox for certain eligible activities and innovations, which the SEC will detail in future issuances. Businesses not listed in the SEC’s eligible activities may still apply, subject to further evaluation.
Applicants must submit a Testing Plan, which outlines the applicants’ testing methodologies, parameters, risk assessments, monitoring plans, evaluation criteria, and key performance indicators. The plan must also include adequate consumer protections.
Upon acceptance into the regulatory sandbox, businesses can begin offering their product or service, strictly adhering to their Testing Plan and informing customers that they are operating in a sandbox. Although participation in the sandbox is only for a limited time, businesses may request an extension from the SEC or propose changes to their Testing Plan as needed.
At the end of the testing period, participants must submit a report summarizing their activities, testing results, and recommendations to the SEC. The SEC will then determine if the participant is eligible to graduate from the sandbox. Participants who successfully graduate can register their product or service with the SEC and offer it to the public.
A Leap for Innovators, Disruptors and Policymakers
The SEC Stratbox is a significant step in the right direction for our regulatory landscape, aligning with global trends toward fostering innovation while ensuring public safety. For businesses with disruptive products and business models, the SEC Stratbox is an opportunity to demonstrate compliance and bring innovative products to the market more efficiently. Participation in the SEC Stratbox offers a pathway for building trust with the government and mitigating legal risks, making it an indispensable option for forward-thinking innovators. Used correctly, the SEC Stratbox has the potential to be an important regulatory tool not only in testing and piloting products, but also (and perhaps more importantly) for private-public collaborative knowledge building and innovation-friendly policy-making.
Gabriel is a Junior Associate and currently a member of the Data Privacy, Cybersecurity & AI, Tax, and Technology Media & Telecommunications Departments of the Firm.
Gabriel is involved in the various data privacy and AI initiatives of the Firm, working with foreign and domestic clients to ensure their projects and operations comply with the country’s data privacy regulations. Gabriel also assists in processing reportorial requirements for businesses looking to make their entry into the Philippine market.
